Economics
Nominal GDP vs Real GDP
Nominal GDP represents the total value of goods and services produced in a country at current market prices, without adjusting for inflation. Real GDP, on the other hand, adjusts for inflation, providing a more accurate measure of an economy's output over time. By accounting for price changes, real GDP allows for a more meaningful comparison of economic performance across different time periods.
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12 Key excerpts on "Nominal GDP vs Real GDP"
eBook - PDF- Kevin D. Hoover(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
“Real” in real GDP, therefore, has a second meaning. A NOMINAL VALUE is defined as a value measured at current mar-ket prices . A REAL VALUE is defined as a value corrected for changing prices (i.e., a value expressed in constant units of money of a particular time) . The second column of Table 2.1 shows the nominal values of GDP in 1960 and 2008, while the other columns show the real values. The table demon-strates that nominal and real values can sometimes coincide, although only in the reference period for the constant dollars (or other currency units in other countries). It also shows that real values are not unique. They can be 2.4 Real Gross Domestic Product 49 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 dollars (billions) -10 10 30 50 70 90 110 index (2005 = 100) 1960 GDP $527 billion 2009 GDP $14,256 1960 GDP Deflator 19 Nominal GDP (left axis) GDP Implicit Price Deflator (right axis) 2009 GDP Deflator 109.8 Figure 2.9. Nominal GDP and Prices, 1948–2009. expressed in the constant dollars of any period, although valid comparisons can be made only if the same period is used for all values. 2.4.2 Converting Nominal to Real GDP The price of Coca-Cola provided a straightforward way of separating real from nominal GDP. But do we have any reason to believe that the changing price of Coca-Cola is a good measure of the changing prices of all goods? Economists believe that it would be more accurate to track the changes in price of a bundle of goods more representative of what is actually produced and consumed. Typically, the price of such a bundle is converted to an index number that takes the value 100 in the reference period. An index number of 200 means that prices in general have risen 100 percent. An index number of 70 means that prices in general have fallen by 30 percent. The national-income accountants publish a price index that reflects the goods and services in GDP.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Market value is the product of two elements: the money price and the quantity produced. 5-2a Nominal and Real GDP Nominal GDP measures output in terms of its current dollar value. Real GDP is adjusted for changing price levels. In 1980, the U.S. GDP was $2,790 billion; in 2013, it was $16,857 billion— an increase of 504 percent. Does this mean that the United States produced 504 percent more goods and services in 2013 than it did in 1980? If the numbers reported are for nominal GDP, we cannot be sure. Nominal GDP cannot tell us whether the economy produced more goods and services, because nominal GDP changes both when prices change and when quantity changes. Real GDP measures output in constant prices. This allows economists to identify the changes in the actual production of final goods and services: Real GDP measures the quantity of goods and services produced after eliminating the influence of price changes contained in nomi-nal GDP. In 1980, real GDP calculated using chained-dollar estimates in the United States was $6,376 billion; in 2013, it was $15,790 billion, an increase of just 247 percent. A large part of the 504 percent increase in nominal GDP reflects increased prices, not increased output. R E C A P 1. Gross domestic product (GDP) is the market value of all final goods and services produced in an economy in a year. 2. The GDP can be calculated by summing the market value of all final goods and services produced in a year, by summing the value added at each stage of production, by adding total expenditures on goods and services (GDP ¼ consumption þ investment þ government spending þ net exports), and by using the total income earned in the production of goods and services (GDP ¼ wages þ interest þ rent þ profits), subtracting net factor income from abroad, and adding depreciation and indirect business taxes.
eBook - PDF- Manzur Rashid, Peter Antonioni(Authors)
- 2015(Publication Date)
- For Dummies(Publisher)
But that doesn’t sound quite right, does it? The economy is producing just as much this year as last year and yet GDP appears to have doubled! In such a situation economists say that, although nominal GDP has doubled, real GDP has remained unchanged. Here’s the difference: ▶ ✓ Nominal GDP: Measured using current prices – that is, the prices that were current at the time. ▶ ✓ Real GDP: Measured using constant prices – which means that an arbitrary year is chosen to be the base year and GDP in all other years is calculated on the basis of prices in the base year. 53 Chapter 4: Gross Domestic Product Why real GDP is the real deal Real GDP is what really interests economists – because it tells them how much stuff the economy is producing in a year. Similarly, if real GDP goes up by 2 per cent, they know that the quantity of goods and services produced in an economy has gone up by 2 per cent. Nominal GDP figures are less helpful: for example, a number of reasons may explain why nominal GDP rises by 5 per cent in a year: ▶ ✓ The price level was unchanged and the actual quantity of goods being produced increased by 5 per cent. ▶ ✓ The price level increased by 5 per cent and the actual quantity of goods being produced remained unchanged. ▶ ✓ The price level increased by 10 per cent and the actual quantity of goods being produced fell by 5 per cent. Despite these very different scenarios, in all three cases nominal GDP has risen by 5 per cent. Real GDP, however, has increased by 5 per cent in the first case, remained unchanged in the second case and fallen by 5 per cent in the third case. Economists think that people should care about the amount of goods being produced rather than the nominal value of those goods, so the changes in real GDP are what really count! Nominal GDP equals real GDP in the base year As the preceding section explains, real GDP is calculated using the price level in the base year. Figure 4‑1 shows the real and nominal GDP for the UK.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production. 19.2 Adjusting Nominal Values to Real Values The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation- adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year. 19.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough. 19.4 Comparing GDP among Countries Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita. 19.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production. 5.2 Adjusting Nominal Values to Real Values The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation- adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year. 5.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough. 5.4 Comparing GDP among Countries Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita. 5.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production. 6.2 Adjusting Nominal Values to Real Values The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation- adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year. 6.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough. 6.4 Comparing GDP among Countries Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita. 6.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator.
- Morris A. Davis(Author)
- 2009(Publication Date)
- Cambridge University Press(Publisher)
GDP and Inflation 3 1.1 GDP 1.1.1 Definition of GDP The key difference between microeconomics and macroeconomics is that microeconomists tend to study one market at a time and in isolation, whereas macroeconomists study the interaction of all markets together. The study of the interaction of all markets sounds like an impossibly complex project. How can we describe the interaction of the produc-tion of apples, bananas, computers, cars, airplanes, frozen orange juice, financial services, etc. in one book? One possibility is to study, in great detail, each market separately and then try to make sense of it all. Macroeconomists employ a different tactic: they add up all of the output that is produced in all of the sectors of the economy (apples, bananas, computers, etc.) and study the sum. This sum is called GDP which stands for “gross domestic product.” Nominal GDP is the dollar value of all output – goods and services – produced in the United States. Real GDP is something else: conceptually, real GDP measures the quantity of all goods and services that are produced. Let’s use a simple example to make these ideas concrete. Suppose everyone in the United States picks apples from trees. Denote the price of apples in US$ in the year 2000 as p a ,2000 and the number of apples picked in 2000 as a 2000 . Nominal GDP in US$ in 2000 would equal p a ,2000 ∗ a 2000 (the price of apples times the number of apples picked), and real GDP would equal a 2000 , the number of apples picked. Growth in nominal GDP between 2000 and 2001 would be p a ,2001 ∗ a 2001 p a ,2000 ∗ a 2000 , 4 Macroeconomics for MBAs and Masters of Finance and growth in real GDP would be a 2001 a 2000 . In this simple example, growth in nominal GDP is equal to growth in real GDP multiplied by growth in apple prices. Real GDP increases when more apples are picked. Nominal GDP increases more rapidly than real GDP when the price of apples increases.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production. 6.2 Adjusting Nominal Values to Real Values The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation- adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that they are measured in the money prevailing in the base year. 6.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the peak of the business cycle and end at the trough. 6.4 Comparing GDP among Countries Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once GDPs are expressed in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of the wealth of a nation. A better measure is GDP per capita. 6.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator.
eBook - ePub- P Mohr, D Yu, S Adendorff(Authors)
- 2020(Publication Date)
- Van Schaik Publishers(Publisher)
The transformation of GDP at current prices to GDP at constant prices is a complicated process. Nominal GDP is broken down into its different components and each of these is then converted to values measured at the prices ruling in the base period. The values of the different components at constant prices are then added together to obtain real GDP. Details of these processes fall beyond the scope of this book. However, the difference between valuation at current prices and valuation at constant prices (ie between nominal and real values) is crucially important when national accounting data are analysed or interpreted.TABLE 2-3 Nominal and real GDP and nominal and real growth rates, 2010 to 2018Year GDP at current market prices (nominal GDP) GDP at constant 2010 prices (real GDP) Growth rates (% change since previous year) (R millions) (R millions) Nominal Real 2010 2 748 008 2 748 008 – – 2011 3 023 659 2 838 258 10,0 3,3 2012 3 253 851 2 901 076 7,6 2,2 2013 3 539 977 2 973 176 8,8 2,5 2014 3 805 350 3 028 090 7,5 1,8 2015 4 049 884 3 064 237 6,4 1,2 2016 4 359 061 3 076 465 7,6 0,4 2017 4 653 579 3 119 984 6,8 1,4 2018 4 873 899 3 144 539 4,7 0,8 Source: SARB Quarterly Bulletin, March 2019.2.7 SOME PROBLEMS ASSOCIATED WITH GDP
Although GDP is the best available measure of aggregate activity in the domestic economy, it is not a perfect measure. As a result, GDP is sometimes jokingly referred to as the “grossly deceptive product” or the “grossly distorted picture”. Users of national accounting data should always remember that the estimation of total production, income and expenditure in the economy is an enormous task. Various conceptual and measurement problems are encountered; it is often difficult to define precisely what should be measured, and the information is also often inadequate. As a result, the compilation of the national accounts involves liberal use 30
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year. 19.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough. 19.4 Comparing GDP among Countries Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita. 19.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator. GDP does not directly take account of leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that society may place on certain types of output. Self-Check Questions 1. Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year. 6.3 Tracking Real GDP over Time Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough. 6.4 Comparing GDP among Countries Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita. 6.5 How Well GDP Measures the Well-Being of Society GDP is an indicator of a society’s standard of living, but it is only a rough indicator. GDP does not directly take account of leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that society may place on certain types of output. Self-Check Questions 1. Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion.
eBook - PDF- Bradley A. Hansen(Author)
- 2006(Publication Date)
- Greenwood(Publisher)
Measuring Gross Domestic Product The most widely used measure of economic performance is GDP. In 2003 the GDP of the United States was $10,987,900,000,000. That is, GDP was more than $10 trillion. GDP is defined as the market value of final goods and services produced in a country during a specific period of time. Each part of the definition is important. To say that GDP is the market value of goods and services means that we use the market prices of goods when we add them up. If a particular car costs $12,000 in 2003 and there are 10,000 produced in that year, that pro- duction adds $120 million to GDP for 2003. Using market prices gives the same importance to each good that buyers give it. If buyers say that each unit of one good is worth twice as much as each unit of another, then each unit of that good counts twice as much in GDP as well. When we use the market prices that existed during a year to calculate GDP during that year, we have an estimate of nominal GDP, also called GDP in current dollars. The problem with nominal GDP is that prices can change even when production does not. If the exact same car that sold for Manufacturing production is one of the key components of the Gross Domestic Product. Getty Images: John A. Rizzo. 22 The National Economy $12,000 in 2003 sells for $13,000 in 2004, and we again produce 10,000 cars, the production of those cars now adds $130 million to GDP. It looks like production had increased when in fact it had not. To get around the problem of changing prices, we keep using the same year’s market prices year after year. For instance, we could use the prices that existed in 1997. When we use the prices that existed in another year to value GDP, the result is called real GDP. If we use 1997 prices, then we say that we have measured real GDP in 1997 dollars.
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